What IR35 Means

Understanding IR35 in Simple Terms

IR35, officially known as the 'Intermediaries Legislation', is one of the most significant pieces of UK tax legislation affecting self-employed contractors and freelancers. Introduced in 2000, its primary aim is to tackle tax avoidance by identifying cases where workers provide services through an intermediary (typically a limited or personal service company) but operate in a way that closely resembles employment. This guide explains IR35 in plain English: what it is, why it exists, how it works, who decides your status, and what you can do to stay compliant.

What Is IR35?

IR35 is tax legislation used to determine whether a contractor is genuinely self-employed or effectively working as a disguised employee. The name comes from “Inland Revenue 35,” the press release issued when the rules were first announced in 1999.

If HMRC decides that your working arrangement resembles employment — even if you invoice through your limited company — you may be required to pay income tax and National Insurance Contributions as if you were on payroll.

For example, if you’re an IT contractor working under the same level of control and performing the same duties as an employee, your contract could be classed as inside IR35.

Importantly, IR35 status isn’t fixed. It applies to each individual engagement, so every new contract needs its own assessment.

Why Was IR35 Introduced?

Before IR35 existed, some employees would resign from permanent roles and return to the same job as contractors operating through limited companies. This allowed both sides to:

• Avoid employer NICs
• Reduce personal tax through dividends
• Move away from employment protections such as holiday pay or sick pay

IR35 was introduced to stop this type of tax avoidance and ensure people are taxed according to how they actually work. HMRC defines tax avoidance as “bending the rules of the tax system to gain a tax advantage that Parliament never intended.”

Inside vs Outside IR35

Understanding your IR35 position is essential for managing take-home pay, risk and compliance.

Inside IR35
You’re treated as an employee for tax purposes. Income tax and NICs are deducted via PAYE. However, you do not receive employment rights such as holiday pay or sick pay.



Outside IR35
You’re considered genuinely self-employed and can operate through your limited company, allowing for greater tax efficiency — including paying yourself through dividends.

How IR35 Status Is Determined

HMRC looks at several key factors when deciding whether a contractor is working as a genuine independent business or as a disguised employee. The most influential areas include:

Control
Who decides how, when and where the work is carried out?
If the client directs your daily activities, this points towards an inside IR35 position.

Mutuality of Obligation (MOO)
Is the client obliged to offer you work, and are you expected to accept it?
A continuing obligation on both sides suggests an employment-style relationship.

Personal Service and Substitution
Can you send someone else to complete the work?
If the contract requires you personally to deliver the services with no genuine right of substitution, the engagement is more likely to fall inside IR35.

Other Factors That Influence IR35 Status

HMRC also considers wider indicators of genuine self-employment, such as:

• Your exposure to financial risk (e.g., fixing your own mistakes without extra pay)
• Whether you provide your own equipment or use the client’s
• Whether you appear integrated into the client’s organisation
• Signs of business activity, such as having a website, insurance and multiple clients

Together, these factors build an overall picture of whether you are truly operating as a business in your own right.

HMRC’s CEST Tool

HMRC offers an online tool called CEST (Check Employment Status for Tax) to help determine IR35 status. However, it has been criticised for oversimplifying complex working arrangements. Because of this, many contractors and end clients choose independent, expert-led IR35 reviews instead.

R35 and the Off-Payroll Working Rules

In 2017 (public sector) and 2021 (private sector), the government introduced the off-payroll working rules, shifting responsibility for determining a contractor’s IR35 status.

Before the reforms
Contractors were responsible for assessing their own IR35 position.

After the reforms

• In the public sector, and in medium or large private sector organisations, the client now decides your IR35 status.
• In small private businesses, contractors continue to determine their own status.

Clients must issue a Status Determination Statement (SDS) explaining how they reached their decision. If you disagree, you can challenge it through the client-led disagreement process.

If the client fails to respond within 45 days, they may become responsible for the tax liability. As a result, understanding IR35 — and being able to discuss it confidently — is now a core part of contracting.

The Core IR35 Tests

HMRC considers various indicators, but three tests carry the most weight when determining status.

Personal Service
This test looks at whether the client is hiring you personally or engaging your business to deliver a service.

Points to consider:

• Are you required to do the work yourself?
• Do you have a genuine, unrestricted right to provide a substitute?

A real, operational right of substitution strongly supports an outside IR35 position.

Control
This focuses on how much influence the client has over your work.

Questions to assess include:

• Who decides how the work should be done?
• Who decides when and where it is carried out?
• Are you supervised in a way that resembles employee management?

The more control a client has, the more likely the contract is inside IR35.

Mutuality of Obligation (MOO)
This test looks at whether there is a continuous obligation for the client to offer work and for you to accept it.

In a genuine business-to-business engagement:

• There is no promise of ongoing work
• There is no expectation that you must accept new tasks outside the agreed scope

If both parties operate as though the relationship is continuous and open-ended, this points towards employment.

Other Important Factors

In addition to the three core tests, HMRC also considers supporting indicators such as:

• Substitution – whether you can send a suitably qualified replacement
• Financial risk – whether you bear commercial risk and fix mistakes without extra pay
• Equipment – whether you use your own tools rather than the client’s
• Part and parcel – whether you appear integrated into the client’s organisation (email address, internal systems, team events)
• Business presence – whether you work with multiple clients, advertise your services, or hold business insurance

No single factor determines IR35 status. HMRC assesses the full picture of how the working relationship operates in practice.

What Is the ‘Deemed Payment’ Calculation?

When you are working inside IR35, you may need to calculate a deemed payment — the portion of your income treated as employment income and therefore subject to PAYE tax and National Insurance.

The basic process includes:

• Removing the 5% allowance (pre-April 2021 only)
• Adding any benefits received directly
• Deducting allowable expenses and pension contributions
• Deducting capital allowances
• Deducting employer NICs already paid
• Deducting any salary already paid
• Calculating and deducting Employer NICs on the remaining amount
• Paying PAYE tax and NICs on the final figure

Since April 2021, where the client or agency is the fee-payer, they are usually responsible for handling this calculation on your behalf.

IR35 and Umbrella Companies

Contractors working inside IR35 often choose to operate through an umbrella company. The umbrella becomes your employer for tax purposes and handles payroll, tax deductions and compliance.

Benefits include:

• PAYE taxes deducted at source
• Access to limited employment rights
• Reduced administration

Drawbacks include:

• Higher overall tax (no dividends)
• Umbrella company fees
• Less independence than running your own limited company

If you’re comparing umbrella vs limited company options, it’s worth reviewing both carefully before deciding which fits your situation.

IR35 and Limited Companies (Personal Service Companies – PSCs)

Many contractors continue to operate through a PSC to benefit from flexibility and potential tax efficiency when working outside IR35.

Advantages include:

• Higher take-home pay through dividends
• Full control over finances and contracts
• Limited liability protection

Disadvantages include:

• Administration and accounting responsibilities
• IR35 risk and exposure to HMRC enquiries

To help strengthen an outside IR35 position, contractors often:

• Work with multiple clients
• Maintain professional indemnity insurance
• Invest in a business website and branding
• Avoid behaving like an integrated member of the client’s team
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Handling an IR35 Enquiry by HMRC

If HMRC suspects that an engagement has been misclassified, they may open an IR35 investigation. A typical process involves:

• Opening letter: HMRC requests contracts, financial information and explanations
• Meetings: Optional — many contractors prefer written responses
• Client contact: HMRC may ask the client about actual working practices
• Decision: HMRC may issue a tax demand, including interest and possible penalties

If you disagree with HMRC’s conclusion, you can appeal through:

• Alternative Dispute Resolution (ADR)
• An IR35 tax tribunal

Recent IR35 tribunal outcomes show that contractors often succeed when they have clear evidence and expert representation.

What Contractors Can Do About IR35

To stay compliant and protect your contracting business, it’s worth taking proactive steps such as:

• Reviewing contracts to ensure they reflect true working practices
• Seeking support from accountants or IR35 specialists
• Gathering evidence of genuine self-employment (emails, refused work, substitution offers)
• Using independent IR35 status reviews
• Challenging incorrect SDS decisions through the disagreement process
• Maintaining a strong business identity with branding, insurance and multiple clients
• Documenting behaviours that differ from employees (e.g., no line-manager reporting, refusing out-of-scope tasks)

April 2024 Updates

Recent changes to IR35 include a new HMRC approach where, in cases of disputed status, they will use reasonable assumptions and their best judgement to estimate how much tax has already been paid. The aim is to reduce the risk of double taxation — where the same income is accidentally taxed twice.

These updates are part of a wider effort to modernise IR35 and better reflect today’s contractor workforce. They may also influence how clients communicate and justify their IR35 decisions going forward, making it even more important for contractors to understand their responsibilities.

 IR35 Is Complex, But Manageable

IR35 can affect your tax position, take-home pay, working rights and day-to-day responsibilities as a contractor. Whether you work alone or run a limited company with multiple clients, understanding your IR35 status is essential if you want to remain compliant and avoid costly penalties.

IR35 isn’t just about what’s written in your contract — HMRC looks at the actual working relationship. By staying informed, securing professional advice when needed and structuring your engagements carefully, you can navigate IR35 with confidence and control.

If you need additional help, many specialists offer contract reviews, compliance checks and support throughout disputes or SDS challenges.

IR35 FAQ for Contractors

What is IR35?
IR35 is UK tax legislation created to identify “disguised employees” — contractors who work like full-time staff but operate through an intermediary such as a limited company. If your engagement is considered inside IR35, you are taxed like an employee through PAYE and National Insurance. The rules ensure tax is paid based on how you actually work, not how the contract is phrased.

Will Brexit delay IR35?
No. IR35 is domestic UK tax law and is unaffected by Brexit. The private-sector reforms rolled out in April 2021 as planned. Any future changes would be driven by UK government policy, not the EU.

How do I stay outside IR35?
To remain outside IR35, you need to operate as a genuine business. That means having the right to send a substitute, maintaining control over how you deliver the work, avoiding ongoing obligations to accept new tasks, taking on financial risk, and showing a clear business presence. Your contract must reflect this reality.

What is IR35 UK?
IR35 in the UK is the legal framework that determines whether a contractor is truly self-employed or effectively an employee for tax purposes. If you are inside IR35, you pay PAYE tax and NICs; if outside, you can use dividend payments and operate more flexibly.

What does IR35 mean?
IR35 defines whether your working arrangement resembles employment. If HMRC believes you are operating as a “disguised employee,” you fall inside IR35 and are taxed accordingly. The assessment focuses on working practices, not just contractual wording.

Will IR35 be delayed?
There are currently no plans to delay IR35. Earlier delays — such as the shift from 2020 to 2021 due to COVID — were one-off decisions. Contractors should work on the basis that the rules are fully active and will remain so unless announced otherwise.

What is IR35 status?
Your IR35 status indicates whether a specific engagement is inside or outside IR35. Inside IR35 means taxed like an employee. Outside IR35 means operating as a genuine business. Status is assessed separately for each contract.

Are outside IR35 contracts still available?
Yes. Outside IR35 roles are still offered widely across IT, engineering, project management and consulting. Medium and large clients must assess status themselves, which can make some more cautious, but many continue to engage contractors on a genuine business-to-business basis.

What should I do after setting up a limited company as a contractor?
Once your limited company is formed, review each contract for IR35 status, ensure the engagement reflects genuine independence, keep clear records, secure business insurance, register for your taxes, and consider getting professional IR35 assessments. Treat your company as a real business from day one.



Does IR35 affect sole-trading subcontractors?
No. IR35 only applies when you work through an intermediary such as a limited company (PSC). Sole traders are assessed under different employment-status rules, but not IR35 itself. However, HMRC can still challenge sole traders if their working relationship resembles employment.